If You Master Volatility, You Master Money

If you don't understand volatility, you won't understand how to win in life. I'm Tom Sasnoff, and I've made a career and built two billion-dollar businesses [music] on the simple idea of capitalizing on volatility. I promise this will be one of the most important pieces I've ever done. But first, we need to understand what volatility actually is. The simplest way to explain volatility is that is the best vehicle for setting reasonable expectations about everything. Understanding volatility in its rawest, most [music] practical and applicable state will change the way you think about trading, investing, taking risk, and building wealth. Volatility is essentially the expected move. It's an accurate measure of probability and risk. Lastly, unlike price, volatility is a statistical measurement with certain mean-reverting qualities. And mean reversion without short-term time restraints is an opportunist dream. I'm going to show you the four key reasons why embracing volatility will help you build wealth. The last reason explains why embracing volatility is more than simply a better way to build wealth. It's also a better way to approach life. Let's get started. Reason number one, opportunity is rarely obvious. To take advantage of mispricing, whether it's emotional or structural, and caused by whatever reason, we need to understand that only comparative volatility pricing can give us the confidence to make a trade. When volatility is high and the market's panicking a bit, asset prices can for a short period drop below their intrinsic value or get way too expensive relative to their true value. When markets disconnect from some form of reality, that's when real money can be made. This type of situation happens in virtually every market from stocks to real estate to alternative assets. Measuring volatility in listed markets is also relatively easy. In non-listed markets, it's more challenging, but can still be done by establishing an estimated price range. Here are some real life examples of valuation mispricing that have happened to me. I live in Chicago and I've never made any real money buying real estate in this city because I never bought any properties that were trading cheap relative to their trading range. I always bought out of want, but never for opportunity. When I invested in financial assets that I thought were cheap due to high volatility and market capitulation or sold when I thought they were expensive due to hype and extreme volatility, those investments were always big winners. We have built, sold, bought back and sold again financial assets for hundreds of millions of dollars simply because we understand volatility. We also understand that counterparties make emotional and impulse buys and that's where the opportunity lies. Reason number two, volatility detects systemic vulnerabilities. It is difficult to detect structural weakness within your investments without understanding volatility. It is virtually impossible to assess your portfolio upside or downside without understanding where the opportunity is coming from. For example, you can't create a portfolio of utility stocks and expect asymmetric upside. On [music] the other hand, you can't build a portfolio of quantum and crypto stocks and not understand that with unlimited upside comes a significant amount of downside [music] risk. Sustained bull markets can fool a lot of professional and do-it-yourself investors. They can hide poor portfolio management practices [music] and a poor understanding of the expected move. But when volatility becomes a part of your decision-making, you begin to appreciate the listed markets [music] and you begin to appreciate that listed markets rarely mispric volatility and therefore speculative investments become well-defined. For example, over my lifetime, I have invested in a number of non-traditional alternative investments. Most of [music] these investments simply didn't work out or they don't work out. I never really understood why my track record was as bad as it was. Then I realized I never invested correctly because I was seduced by the upside and never understood the real downside risk. In other words, I treated these investments like they were 50/50 shots, but they should have been priced 9010 against me. So, my allocations and deal structure were horribly wrong because I never assigned the correct volatility to these trades. Live and learn. I do much better now. Reason number three, volatility is predictive. Volatility is a tradable fear gauge. So it's very real for today, tomorrow, and six months from now. When we discuss volatility, we talk about implied volatility because implied volatility measures how volatile the markets will be in the future. Historical volatility measures what has happened in the past. Most importantly, having a tradable fear index lets us know in real time the market's temperament and appetite for risk. So we know if the market is complacent or capitulating, and we know if the derivatives market is pricing premium, rich or cheap. It is so important to [music] eliminate the guessing game and to take the subjectivity out of the decision-making process. Again, for example, I was a CBOE exchange market maker for almost 20 years. I predated the VIX and when trading in the pits, I would have to guess if volatility was expensive or cheap. We simply did not know and I'm sure we gave away a ton of money because we were trading in the dark. Fast forward to today's front-end technology and retail traders have IVR, implied volatility rank, to give them context about the levels of implied volatility. It's front and center on almost every trading platform. And they also have implied expected move which is derived from an individual's equity implied volatility on every single trade page. So the game has changed completely and volatility [music] is truly front and center. Reason number four, volatility creates efficiency. Volatility helps to improve basis. It creates speculative opportunity and allows for strategic capital efficiency. That's a mouthful, but let's dig into it. One of the most important uses of heightened volatility is for writing calls or writing puts against an underlying to [music] improve the cost basis. The higher the implied volatility, the higher the option prices and the higher the probability of profit. I believe that any opportunity you have to limit profitability in return for a higher probability of profit is one of the most sensible things you can do when investing. Trying to improve basis is a must-have strategy for passive and active investors alike. Volatility can also help to create high alpha opportunities because it opens the door to outlier cases. It opens the door to binary events and earnings trades. We are indifferent to strategy selected. But almost every option strategy is more effective in periods of high implied volatility. Remember volatility is a math equation. It is mean reverting and as such it contracts twice as often as as it expands. Lastly, volatility can be addressed through strategic capital efficiency. In other words, because it is tradable, you can use defined or undefined risk. So, there's a ton of optionality. This means if something looks attractive because of heightened volatility, it can be traded using a minimal amount of risk capital. As an active trader, volatility plays the biggest role in my daily trading. I have to check the volatility box or I won't make the trade. If volatility or if watching volatility is new to you, start with IV rank just makes things a lot [music] easier and it's front and center on virtually every platform. Individual volatilities are a little bit confusing because you're not sure how to give them context. But start with IV rank and if the IV rank is high, you're usually pretty safe to move forward. Thanks for watching this video. I look forward to your reactions in the comment section. I read every comment and respond to as many as I can.